This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

10 January 2012

France and Germany versus the Psychopaths

Two primary traits distinguish psychopaths from the rest of us. First, they have no empathy. Second, they are always right, even when they are wrong. They cannot admit fault or take responsibility. They make their own “morality.”

Recently William Cohan, a writer and columnist for Bloomberg.com, accused the leaders of our big banks of being psychopaths.

If the shoe fits, they should wear it. Have you ever seen a big-bank CEO show the slightest empathy or remorse for making tens of millions unemployed, underemployed, or homeless, or for trapping millions more in a daily hell of on-the-edge anxiety? And as for always being right, what about Jamie Dimon, who trots the globe telling everyone who will listen that the slightest taxation or regulation of banking will destroy that so-called “industry,” which has done so much for all of us the last five years?

Bankers don’t admit the slightest fault. They were just doing what comes naturally: building financial houses of cards that make themselves obscenely rich and periodically fall down, bringing an otherwise thriving economy to ruin.

For guilt, they point their fingers at Fannie and Freddie. But we all know the truth. The collapse of Lehman Brothers and AIG caused the Crash of 2008. Those firms were private. And AIG now is again, after we taxpayers bailed it out.

Not only that. When Hank Paulson sought to stem the initial damage by handing out over $120 billion of our tax money in that infamous meeting in October 2008, the recipients in the room were all CEOs of our biggest private banks: Bank of America, Citigroup, Goldman Sachs, Merrill Lynch, Morgan Stanley, State Street, and Wells Fargo. Fannie and Freddie weren’t even in the room.

So who, if anyone, is trying to save us from the psychopaths? The answer might surprise you. France and Germany (or at least their leaders) have buried ancient animosities and the hurt from two world wars and are joining hands. They want to make banks eat 50% of the losses from their mistakes in lending to Greece, relying on derivative “insurance” from the psychopaths.

The psychopaths don’t want that at all. No, no, no! If minor banks had to obey the normal rules of capitalism and pay for their mistakes, they would stop gambling at the big banks’ casinos and might actually make prudent loans. Eventually, they might unwind the $600 trillion overhang of derivatives that threaten another Crash of 2008 at any time. At least they wouldn’t add to it. The horror! The horror!

France and Germany also want to levy a tiny financial transactions tax. Its purpose is simple. When the finance psychopaths next ruin a perfectly functioning industrial economy again—as they have over a dozen times in the last 200 years, and will again—the bailout will come from a fund they financed, rather than from taxes paid by real businesses and ordinary working stiffs.

How big is the tax to be? A mere 0.1% (one one-thousandth) on stocks and bonds, and 0.01% (one ten-thousandth) on derivatives.

It’s hard to ken what those numbers mean, because it’s hard to fathom the astronomical sums that these psychopaths daily put at risk.

If you’re a millionaire, you might feel proud of yourself. But on that dark day in 2008, Hank Paulson handed out over $120 billion of our tax money. You might think of 120,000 of you, standing in a very long line, just to give up your entire net worth to save the bankers.

And as for the overhang of derivatives—that incomprehensible $600 trillion—you can think of it as the aggregate net worth of 600,000,000 millionaires. If every single person in the entire US and the EU, including infants and the elderly, were a millionaire, the collapse of that house of cards would bankrupt nearly every one of them.

And what about that vicious transactions tax? Well, suppose you’re an average upper-middle-class professional, making $100,000 per year. (That class is under attack right now and may become extinct. But it isn’t yet.) At 0.01%, a derivatives tax on your entire annual income would amount to ten dollars.

Not being a psychopath, you probably have some empathy and generosity. So you might drop that much into the hat of a beggar or the Salvation Army at Christmas time. You certainly would give that big a tip—probably more—to a good waiter who made a special dinner a happy one.

But faced with that minuscule level of taxation on their casinos, the bankers won’t hear of it. They pull the strings of their puppets in the US and UK. Then the puppets raise their wooden arms and vote against the tax.

The puppets say the tax has to be global to work at all. That would certainly be better: then the bankers couldn’t flee to Shanghai, the Cayman Islands or Manhattan to continue their psychopathy. But the puppets are making no moves to levy the tax in the English-speaking world, which is still in thrall to the psychopaths.

There is only one prominent voice in Anglo-America who stands against them: Jon Huntsman, Jr. He has proposed yet another solution, but one that also might work. He would simply break the big banks up. He would make them small enough to fail again, and he would force them to compete against each other for business. In other words, he would take them off the public tit, converting them from psychopathic sucklings back into capitalists.

So when you think of That Idiot Rumsfeld’s “Old Europe,” thank God it still exists. Thank France, where Nicolas Sarkozy led the charge to liberate Libya and is leading the charge to impose a financial transactions tax. And thank Germany, where CEOs earn ten times the pay of the average worker, and where hard bargainer Angela Merkel is trying to make the banks take responsibility for their mistakes. Don’t thank the “Grand Alliance” of the US and the UK, which still believes that we need these psychopathic parasites. For what?

Those states will change only when their people rise up. More likely, they will change when members of their real ruling class—industrialists and the few remaining honest bankers—wise up.

Have you ever heard of an economic collapse caused by real industry? Did Apple, Boeing or Caterpillar cause the Crash of 2008? Did steel, railroads, or emerging electric industries cause the Great Depression?

Not hardly. These and other real industries busy themselves creating wealth and making the world a better place every day. Then the finance psychopaths come along and blow the whole system up.

We will start to rein in the causes of all financial crashes in human history—finance psychopaths—only when the leaders of those and other industries come to understand a basic truth. You can have a vibrant and thriving global industrial economy. Or you can have a laissez faire financial sector where finance psychopaths can do what they want to enrich themselves. You can’t have both.

Your call, industry. We, the people are counting on you, because Jon Huntsman probably won’t make much headway until 2016. By then, unless France and Germany win, the next Great Depression may already have set in.

Are All Bankers Psychopaths?

As recently as three decades ago, that question would have been laughable. Bankers were pillars of the community, staid, proper, prudent and boring. They had two things increasingly rare in our go-go, me-first society: gravitas and a sense of responsibility. They got rich, but not that rich; they lived in the big house on the hill, but without in-your-face ostentation. In fact, their riches, which were quite modest by today’s standards, set them apart and embarrassed them a bit, and they tried to hide them.

Even some big bankers had the same spirit. A.P. Giannini, the founder of Bank of America, was like that. He was a people person first, a banker second. Back when his bank was the “Bank of Italy” in San Francisco, he succeeded by knowing his customers and taking sensible risks to help them when no one else would. After he expanded to Los Angeles, he got to know the leaders of Hollywood and helped many of them personally. Producers, actors and directors used to tell how his personal banking had made their careers.

Community bankers cared about their communities and the people they served. Many still do. Even some big bankers did. So how did the pillar of the community morph into the pitiless pillager?

I think three factors did it: size, remoteness, and an inhuman culture of over-the-top capitalism.

When a bank has thousands of branches and millions of customers, no single manager, let alone the CEO, can know their names, let alone their characters and needs. Community banking becomes impossible. So what takes its place?

That’s where the MBAs and green eyeshades come in. They reduce loan applicants and other customers to ciphers on a page. All an entrepreneur’s vision, initiative, hopes, dreams, fortitude and industry become abstractions on a standardized form. All the intangibles that community bankers and A.P. Giannini once used to assess real risk on a human scale vanish, replaced by sterilized ciphers.

As this process of sterilization was overtaking the nation, community banks merged into regional monsters located in distant cities and then behemoths headquartered on Wall Street. Bankers’ remoteness from their customers made it impossible to know even the important ones. And remoteness from legions of inferior employees made it even more necessary to reduce customers and risk judgments to ciphers on a page.

No wonder bankers became inhuman! They divorced themselves from human contact by reducing their customers to mathematical abstractions one to three time zones away.

The final ignominy was culture. As banks became bigger and bankers more remote from their customers—with the biggest banks relocating to Wall Street—bankers’ culture changed. They became an insular tribe without community and therefore without moral values. Their moral lodestars became their profits and stock prices, the higher the better.

Living so far from the people and places they served, bankers became completely oblivious to the damage they caused. The reductio ad absurdum was Lloyd Blankfein, CEO of Goldman Sachs, who testified in Congress to “doing God’s work” after helping destroy the global economy.

So what turned bankers into psychopaths was not some hidden internal devil of banking. Nor was it an inherent character flaw in bankers themselves. It was the terrible logic of business, institutional and social changes that cut bankers off from the rest of humanity. It was also the culture of Wall Street, in which profits and stock price are the sole moral values, and they gain irresistible traction with fallible humans by determining their pay. Pillaging followed as night the day.

You can reduce systemic risk by better oversight and stronger regulation. And of course we should. You can tax financial transactions and build up a fund to help ameliorate the worst consequences of inevitable pillaging. And of course we should. But you can’t change the picture described above in an insular culture of conditioned vultures, all located in a single city (Manhattan) physically and culturally alienated from the rest of America.

That why Jon Huntsman’s solution—breaking up the big banks—deserves a sustained closer look. Of course we can’t go back to nineteenth-century America. But we can carefully design and shape institutions, in this case banks, so as not to leave behind the community spirit and individual customer relations that once made American business pre-eminent not only in profits, but in fairness and humanity as well.

There are ways to break up the big banks legally, without passing new antitrust laws or violating the constitutional prohibition against impairing the obligations of contracts. I have suggested one. Huntsman may have others. (And by the way, smaller banks can still do big deals, the same way they used to, by syndication. Syndication also has risk-reducing potential, for it forces several independent minds to assess the same risks.)

But one thing is certain. Humanity does not flow from inhuman institutions imposing inhuman values on real people. That way lies revolution.

After our revolutionary War of Independence, we Americans have always found ways to avoid violent revolution through peaceful social evolution. We did it with collective bargaining in the age of labor unrest. We did it with peaceful protest and legal reform in the Civil Rights Era of the 1960s. We even did it with peaceful protest in the Vietnam Era, although Iraq and Afghanistan suggests that the lessons of those years need reinforcement.

We can do it now with our finance sector, too. But we first have to recognize the problem. Can we do it without another Crash of 2008, which this time might presage a second Great Depression? I hope so. But the hour is late and time is wasting.

2 Comments:

Thanks for your support. Sorry for the delay in responding, but I’ve been traveling.

Like all blogs on Google’s Blogger, this one is free. The easiest way to “subscribe” is to bookmark this link to the home page. You can also access recent but older essays through this link [see the right hand sidebar] or search for any essay by title or subject matter on this index. The index usually omits a few of the most recent essays, so if you want to find something recent that is not on the current home page, try the second link above.

As for RSS feeds, I’ve enabled them, but I don’t use them myself. The easiest description of how to subscribe that I was able to find quickly is here. In this help page, just replace "blogname" with "jaydiatribe" [with no space]. I tested it just now, and it worked for me.

I’m now in the process of collecting some of the essays on this blog into books on various topics, with updates and connecting material. I intend to publish those books, probably on Amazon’s Kindle, for a nominal charge. I expect the first such book to appear this spring, and I’ll announce it on this blog.

If this information doesn’t help, please feel free to inquire further in the comments, and I’ll do what I can.

Links to this post:

About Me

This blog reflects a quarter century of study and forty years of careers in science/engineering (7 years), law practice (8 years) and law teaching (25 years). A short bio and legal publication list appear here. My pre-retirement 2010 CV appears here.
As I get older, I find myself thinking more like an engineer and less like a lawyer or law professor. Our “advocacy” professions—law, politics, public relations and advertising—train people to take a predetermined position and support it against all opposition. That’s not the best way to make things work—which is what engineers do.
What gets me up in the morning is figuring out how things work and how to make them work better, whether they be vehicles, energy systems, governments or nations.
This post explains my respect for math and why you’ll find lots of tables and a few graphs and equations on this blog. If you like that way of thinking, this blog is for you.